Key Post Should I keep or sell this investment property in negative equity?

FutEng

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My wife has ongoing dealings with KBC on her PPR (she now lives in my PPR since we got married) at the moment. She is facing a 80k shortfall. She is going to try and sell the property based on their advice.

She has told them in no uncertain terms that she wont be able to meet the short fall over 10 years.

I think its a matter of hammering things out with them, they will assess you using the financial statement form and as Brendan said they cant get blood from a stone. I still reckon she will be left with a size-able monthly payment to them over 10 years when all is said and done but she is losing 600 a month on the property at the moment and its completely unsustainable. It has also wrecked her health to the point where I am now taking control of matters and trying to resolve it quickly.
 

FutEng

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Mortgage amount remaining 237000
Mortgage term remaining 24 years
Interest rate 5.12% ( investment property rate)
Lender KBC
Rent received 800
Other expenses on this property: 1100 Management, 500 fridge (2012), NPPR, Property Tax PRTB etc.

Value of apartment: 130000

Proposal from lender for dealing with the shortfall: Pay off what you can over 10 years following financial assessment.

Gross salary: 35000 in a permanent civil servant role

Notes: Bear in mind my wife also has to help with the costs of running my principal residence (600 p/m), child minding (600 per month) and medical costs (300 per month) along with car expences (300 per month diesel etc). I cover the mortgage on our home (property in my name), I cover all the utility bills but she buys all the food.

Other Notes: She has written to them twice requesting all her data under the freedom of info act and has received no response withn 40 days. (should I be optimistic?!?!?)
 

Brendan Burgess

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Hi Futeng

I will just deal with how to approach this from a financial point of view.

she is losing 600 a month on the property at the moment
The big mistake people make is to say "The rent is €800, the repayments and other costs are €1,400 - therefore I am losing €600per month. " What they forget is that an element of the repayments is capital.

So let's look at the P&L for your wife.

Rental income|€800 per month|€9,600
Interest|237k@5%| €11,850
Management charges||€1,100
Property Tax||€200
PRTB|| €90
Other||€1,000
Income tax|| 0
Total costs||€14,240
Loss|€400 |€4,640
 

FutEng

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Thanks Brendan. Your correct of course, paying the capital is reducing the amount owed.

Even at 400 a month, I think we may have to sell.

Thanks for the advice.
 

Brendan Burgess

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What happens if she sells the property for €130,000?

She will be left with a deficit of €107,000.

The interest on this would be €107,000 @ 5.12% = €5,474 or €450 per month.

So it's a very close call indeed and you need to factor in the other issues.


  • The outlook for house prices in the area where the apartment is
  • The outlook for interest rates
  • The outlook for rent and the reliability of the tenant
  • The hassle in managing the apartment
Bear in mind my wife also has to help with the costs of running my principal residence (600 p/m), child minding (600 per month) and medical costs (300 per month) along with car expences (300 per month diesel etc).

Actually, this is not relevant to the decision on whether to hold or to sell the investment property. She has to pay these anyway.
 

Brendan Burgess

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Now let's look at the cash flow implications of selling vs. continuing to rent


Rental income|€800 per month|€9,600
Repayments |237k@5% over 24 years | €17,000
Management charges||€1,100
Property Tax||€200
PRTB|| €90
Other||€1,000
Income tax|| 0
Total outgoings||€19,400
Net cash outflow|€800 |€10,000

What would be the cash cost of their proposal?

The repayments on €107,000 @ 5% over 10 years would be €1,100 per month .

So from a P&L point of view and from a cash-flow point of view, you are better off hanging onto the property.
 

FutEng

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Close call either way but I lead a very busy life and I really don't want her stressed over this property anymore. Life is too short, so selling is looking like the lightly route.

Location is excellent. It never idle as there is a hospital, university and 2 FDI parks within a mile radius.

There is no demand for this type of property however from a home owner viewpoint. Top floor apartment, 2 bed apartment with no lift.

It could take a while to shift it.
 

Brendan Burgess

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So what should she do?

She clearly cannot afford to sell the property and pay off the loan over 10 years.

She should look at the following options.

1) Retain the property and pay all excess of rent over expenses to KBC. This will leave a shortfall of €400 per month on the interest. The amount outstanding will continue to rise.

2) Pay the interest only on the mortgage. KBC might not like this, but they should accept it.

3) Sell and pay the interest on the shortfall. This would cost €107,000 @5% or €450 per month.

4) In extreme situations, look at applying for personal insolvency.
 

Brendan Burgess

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There may be more scope for doing a deal on an unsecured debt than on a secured debt.

It's very unlikely that you will get any sort of write-off from KBC while you still hold onto the property.

If you sell the property, KBC will have an unsecured loan. They will immediately make a substantial provision against this in their own accounts although they will continue to expect repayment for it.

It would be much easier for your wife to apply for a Debt Settlement Arrangement than a Personal Insolvency Arrangement. Or you might even consider going to the UK for bankruptcy and an unsecured debt is much easier to deal with than a secured debt.
 

Brendan Burgess

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Hi FutEng

In your first post, you said
She is facing a 80k shortfall.
In the detailed statement, you said that the property was worth €130k and the mortgage was €237k - this suggests a shortfall of €107,000.

It's a fair difference. I have used the more detailed figures you have given.
 

Bronte

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The shortfall of 107K will be higher because there are auctioneer and solicitors fees to be paid.

Any loss on the rental income is a good thing as it can be carried forward, so in later years when needed you won't immediately hit paying tax.

It is not realistic to look at this unless we know the salary of the OP. Strange that he refers to the home as HIS principal residence when is it the princiipal residence of both parties. And indeed she is contributing to the paying down of that mortgage. (via the household bills she pays)

BB you concluded correctly that this is a 400 Euro 'loss' but how much is the capital repayments. This is a cost that has to be accounted for, even though it is a form of saving to acquire an asset.
 

Brendan Burgess

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Hi Bronte

Some very interesting comments there. They improve the Key Post quite a bit.


The shortfall of 107K will be higher because there are auctioneer and solicitors fees to be paid.
Correct. But as these should be around €2,000 they don't affect the overall decision. In the earlier post, he said that the shortfall was €80,000.

Any loss on the rental income is a good thing as it can be carried forward, so in later years when needed you won't immediately hit paying tax.
I don't agree that a loss is ever a good thing. In this particular case, the taxable loss is very small

Rental income|€800 per month|€9,600
allowable Interest|237k@5% @75%| €8,900
Management charges||€1,100
Property Tax||€200
PRTB|| €90
Other||€1,000
Income tax|| 0
Total allowable costs||€11,300
Loss for tax purposes ||€1,700

But it does raise another factor to be considered. In most cases people will be making an accounting profit but will actually be paying tax because they can only write off 75% of the interest against the rental income.

It is not realistic to look at this unless we know the salary of the OP.
I think that the decision to sell or hold is independent of the salary of the OP and his wife. Except, if she is on a very low incomes, she might be better off filing for bankruptcy or a Debt Settlement Arrangement.



BB you concluded correctly that this is a 400 Euro 'loss' but how much is the capital repayments. This is a cost that has to be accounted for, even though it is a form of saving to acquire an asset.
I thought I had dealt with this by showing a loss of €400 per month but a net cash outgoings of €800 per month? The repayments are €17,000 and the interest is €11,850 so they would be repaying capital of €5,000 a year or €400 per month.
 

Brendan Burgess

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Posted by Mannin in the other thread

I attended a meeting with my wife and the KBC rep recently and the young KBC chap started asking me about my own mortgage and income which I thought was a bit much considering my wifes name is not on the deeds/mortgage of the family home and my name is not on the deeds/mortgage of my wifes apartment.
Politely remind them that you are not their customer and your circumstances are none of their business. What would your mortgage provider think if KBC jeopardised the security of your mortgage to improve the performance of the KBC mortgage.
 

Brendan Burgess

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This is not as straightforward as it seems.

They have a right to ask, especially if she is claiming that she can't meet the contractual repayments because of her family circumstances. The husband has no obligation to answer, but then KBC has no obligation to do a deal.

If she wants to sell the property, she needs KBC's permission. KBC can refuse this. They might do a deal if the husband agrees to get involved. I am not saying that he should or should not, I am saying that it could be a bargaining tool to get a deal.

For example, if she had no income or a low income, she could threaten personal insolvency. The husband might agree to guarantee half the shortfall, if they wrote off the other half.

I think that the correct response to such a request would be " The house is in my wife's sole name. My house is in my sole name. If you want me involved, I will give you whatever information you want if you agree to write off half the shortfall".

Brendan
 

FutEng

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Some excellent contributions here, thank you.

The 80K shortfall figure came from me using an Estates Agents figure of 150K that he said we could potentially get for the apartment. Since then I have spoke to 2 other EA's who suggest 130K is more realistic.

So 107K is more like it, plus additional expenses.

That an interesting point that I could use my resources to help my wife bargain a write down of some of the shortfall. I had thought of that but I suppose I just find it very hard to trust the banks. Say we sell and are left with a shortfall and whats the guarantee they'll do a deal.
 

FutEng

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Just yesterday my partner got another letter of variation from them...

It offers 'a less than interest only' agreement where the costs of the running the property are deducted from the gross rent and they get the net.

Again its delaying the inevitable in my partners case as the mortgage is unsustainable in the long term and these short term 'fixes' is can kicking in the extreme.

She has offered to sell the property but they don't appear to be interested. It was a PPR when she bought it but it was converted to an investment in 2009 when she moved into my house.
 

Brendan Burgess

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Hi FutEng

I hate the expression "kicking the can down the road". Most of the time it's meaningless as it is in this case.

If your wife pays the full interest, she is facing a shortfall of €400 per month. Now that they will accept less than the full interest, it will cost her something less than €400 per month.

She is a public servant on an income of €36,000 a year. She doesn't like owning a house in negative equity, but the reality is that she can afford to pay the interest on this loan and so should continue to do so.

From KBC's point of view, house price increases may result in her exiting negative equity. In the meantime, they are getting the rent from the property. If they sell and your wife refuses to pay the shortfall, they will be earning less on the €130,000 sales proceeds.

She could consider a Personal Insolvency Arrangement or play it tough and insist on a sale. http://www.askaboutmoney.com/showthread.php?t=176234
 
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